How to slice the pie when founding a company
Sadly, there is no easy algorithm for dividing up the initial shares in a company.
But getting it ‘right’ is critical.
Take the time to discuss allocations between founders and feel good about the decision. These are the foundations upon which a company will be built.
Some principles I have learned the hard way
The following are not always true but usually, they are.
‘Equal shares’ means you haven’t talked about it
If there are three people with 33% each or two with 50% each, this usually indicates to me that the founders have not had a deep conversation about who will be accountable for what as this company grows.
- Is everyone getting paid the same, or are some people investing more sweat?
- Does each person deliver the same value in the first few years, or are some people more critical than others?
Too many founders can dilute alignment
Too many founders, minimising the amount of equity each can own, can get to a point very quickly where alignment is diluted, and motivation diminishes.
Make sure each person has enough to be meaningful.
Questions you can ask to test if you got it right
If you ask these questions at the start, you can prevent frustrations from quietly rising in the years to come.
- How does each person feel? When all founders look at the cap table, does it feel fair? Does it represent what each person sees as the job to be done?
- Who is taking the risk? Who is creating the risk? Is that reflected in the ownership structure?
- What happens over time? Tell each other the story about what you intend to do over time and how this will cause dilution and growth. In 10 years time is everyone as motivated as they are today?
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